Which of the following terms describes why people may hold some money in case of emergency?
A. Speculative Motive
B. Transactions Motive
C. Precautionary Motive
D. People never hold on to money due to the opportunity cost of holding cash
E. None of the above answers are correct
Answer (2)
The correct answer is C. Precautionary Motive, which refers to holding cash for unexpected expenses or emergencies. This motive emphasizes the importance of having a financial safety net. Understanding different motives like speculative and transactions motives helps clarify why people choose to hold onto money.
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The term that describes why people may hold some money in case of emergency is (C) Precautionary Motive.
In economics, people often choose to hold onto a portion of their money as a safeguard against unexpected situations or financial emergencies. This behavior is known as the precautionary motive. It reflects the idea that individuals want to be prepared for unforeseen expenses such as medical emergencies, car repairs, or sudden job loss.
Holding money for precautionary reasons is one of the primary motives for holding cash or liquidity. The other common motives include:
Transactions Motive: This refers to the need to hold money for everyday transactions and regular expenses like buying groceries, paying bills, which require immediate cash or liquid assets.
Speculative Motive: This involves holding money to take advantage of future investment opportunities or to speculate on changes in interest rates or stock prices. People hold onto cash in anticipation of prices or interest rates moving in a way that benefits their investment decisions.
While the opportunity cost of holding cash means that money not invested could potentially earn more, many people still choose to hold some cash as a safety net due to the precautionary motive. It's a balance between minimizing risk and managing potential financial uncertainties.
